Equipment Financing Basics

The cannabis industry is burgeoning, with existing firms working to gain market share and innumerable potential firms looking to enter the marketplace.

Regardless of the precise stage a business has reached, wisely investing in top-of-the-line equipment might well be the most important prospective capital expenditure any cannabis brand or manufacturer will make. Equipment can be expensive, highly specialized, and newly improved technological iterations are introduced at a frenzied pace.

Scaling while staying technologically current is a huge challenge that requires effective financing of modern equipment and technology.  Arranging for that financing via conventional avenues, cannabis companies soon realize, is no easy task. Companies quickly learn that accessing traditional debt markets — particularly bank loans — is difficult, if not impossible.

The business can consider equity capital raises ranging from an initial friends and family round, to a substantial venture capital-backed funding series. While there’s no question that equity funding can be both vital and beneficial for cannabis firms, there are drawbacks. Companies can anticipate elevated discount rates demanded as compensation for perceived high risk. Post-money capitalization structures will virtually always be dilutive and in many cases, proposed dilution is so substantial that it jeopardizes ownership control.

Finally, there is likely a misalignment between the time horizon of equity investments, which are frequently permanent, and the economic reality of using those funds to purchase capital goods, which depreciate significantly in value virtually immediately.

The ultimate salvation of the U.S. cannabis industry may well come in the form of non-bank specialty finance firms. Specialty finance firms typically provide financing structures to businesses unable to tap the broader capital markets. Such firms are beginning to offer cannabis businesses an array of mechanisms to access equipment and technology without dilution or onerous credit terms.

The beauty of specialty financing transactions — especially leasing and royalty structures — is that upfront costs for customers are minimized. For these businesses, where free cash flow and burn rate are vital, spending less cash at the outset is a huge leg up. Done well, with technology in hand, the business can throw off cash in the near term, allowing it to easily meet monthly payments.

The best specialty financiers will effectively allow companies to move forward with scaling efforts by ensuring that supplementary and next-generation equipment/technology is accessible at reasonable cost when needed.

Cannabis businesses that turn to specialty finance can often, when desirable, turn variable costs into fixed costs. In many cases, firms can avail themselves of notable tax benefits and deductions.

In theory, the emergence of specialty finance firms with subject matter expertise in cannabis technology is transformative, democratizing the industry and providing a level playing field on which those companies with the best business models and products will have the opportunity to prosper. However, not all specialty financing arrangements are made equal.

 

Here are some basics on our capital equipment leasing program including what items we will need to proceed.

 

We arrange Capital Equipment leases to companies such as equipment manufacturing companies, processors, growers and dispensaries.  Items that we typically lease are extraction equipment, roto-vap systems, chillers, cartridge filling equipment, lab equipment, generators and most of the more popular LED grow lights.  Any requested items below $10K will not typically qualify.

 

Our knowledge of the industry and extensive network of private investors helps us deliver solutions to achieve our client’s and partner’s financial requirements.

 

Our program structure is tailored to clients individually based on what fits their criteria.  Below are basic guidelines and general terms, however, each project is viewed individually and terms could vary slightly on a case by case basis.

 

Types of Equipment We Can Get Financing For:

 

Cultivation:  Lighting, irrigation, Security

Processing and Manufacturing:  Includes dryers, extraction equipment, distillation, refrigerators, packaging

Build-out:  HVAC, solar, generators, lighting

Testing:  Equipment for labs including mass spectrometry

 

 

 

Capital Equipment Leasing Basics

 

Equipment Lease to Own

  • $250K – $10mm
  • 24-48 Month Leases (principal + interest)
  • 30% to 50% down payment (Typically finance up to 70% of the equipment’s hard cost)
  • Personal Guarantee required (or corporate)
  • $1 Buyout at end of the lease term

 

Submission Requirements:

  • 2 years tax returns
  • 3 months bank statements
  • PFS – Personal Financial Statement from all personal guarantors (or up to date corporate financials – Profit &Loss, Balance Sheet)
  • Need to show the ability to pay down payment plus first 6 months of lease payments (cash on hand)
  • List of equipment from manufacturer – itemized quotes for equipment from the equipment manufacturer

Benefits of a Capital Equipment Lease:

  • Conserves working capital
  • Allows companies to better manage budgeting cycle
  • Inherent tax benefits
  • Master Lease Agreements make follow on transactions much easier.

 

Why work with us:

 

We have been serving this industry since the recreational initiative first passed in Colorado seven years ago.  We partner with the most reputable lenders and know how to get deals across the finish line.

 

Structure/Term Optionality: The needs of each customer are unique, and so we are able to offer a range of programs depending on the life cycle of the business and its unique circumstances.

Technological Expertise Throughout the Life Cycle: Elite specialty finance providers serve as valued business partners, anticipating customers’ needs and standing ready to meet them. Cannabis technology is specialized and it’s continually changing — different machinery may be needed for different processes and the innovation curve is steep.

White glove service: Financing is a complex, involved process and we go further, offering our clients comprehensive support throughout the process.

Success Story:

 

Situation: An equipment vendor needed financing for his customer. The vendor was going to lose the sale unless alternative financing was obtained.

Solution: An equipment finance agreement with a large down payment that compensated for the customer’s weak financial profile. The customer received an affordable monthly payment for the next two years.

Results: The vendor made the sale and is putting people to work in his factory. The customer is now maximizing their warehouse space with the new equipment.

 

Contact us to become our next one!

 

 

 

SAFE Banking Update

THE SAFE BANKING ACT AND THE 117TH CONGRESS

 

During the 116th Congress, the SAFE Banking Act (Secure and Fair Enforcement-H.R. 1595/S. 1200) became the first cannabis-related bill passed by a chamber of Congress. In September of 2019, SAFE came to the House Floor and passed by a significant margin of 321-103.

The SAFE Banking Act would allow banks and financial institutions to legally do business with the cannabis industry without fear of federal arrest or prosecution or other punitive actions. This proposal had been considered the most likely piece of cannabis legislation to pass in the current Congress and will likely get new life in the incoming session.

While the bill had a hearing in the Senate Banking Committee back in the summer of 2019, unfortunately, it did not gain the momentum needed to move forward.

In addition to the bill itself, the SAFE Banking Act was also included in not one but two COVID-19 relief packages passed by the House, known as HEROES I & II. Again, it succumbed to the objections of the Republican leadership and was removed from the bills.

Senate Banking Committee Mike Crapo (R-ID) detailed his opposition to policy reform:

“I remain firmly opposed to efforts to legalize marijuana on the federal level, and I am opposed to legalization in the State of Idaho. I also do not support the SAFE Banking Act that passed in the House of Representatives. Significant concerns remain that the SAFE Banking Act does not address the high level potency of marijuana, marketing tactics to children, lack of research on marijuana’s effects, and the need to prevent bad actors and cartels from using the banks to disguise ill-gotten cash to launder money into the financial system.” 

Currently, 33 states have some form of legal marijuana for a variety of uses.  This has created challenges for businesses in those states and has resulted in increased pressure for depository and financial institutions to provide financial services to both state-sanctioned businesses and ancillary services providers that may provide services to state-sanctioned businesses.  The ancillary service providers offer a variety of services to state-sanctioned businesses, such as legal services, plumbing services, fertilizers and other agricultural supplies, real estate, and leasing, among many others.  As a result, Senators Jeff Merkley (D-Oregon) and Cory Gardner (R-Colorado) introduced S. 1200 on April 11, 2019.  While marijuana would still be illegal at the federal level, this proposed legislation seeks to provide legal certainty for banks who wish to serve not only marijuana companies, but also the ancillary service providers, meaning that banks can accept cash from legally-operating state cannabis companies and related service providers without the fear of adverse actions being taken against them by federal financial regulators.

There is, however, reason for optimism as in the next session, the SAFE Banking Act will be back, and with even better chances to pass! Sources have indicated they expect the bill will be reintroduced in both the House and Senate in the next 1-2 months, and this time look forward with fingers crossed to a more favorable outcome.

Cannabis banking legislation: Prospects for passing legislation that would make it easier for marijuana businesses to access banking rise significantly with Democrats in control of the Senate. The SAFE Banking Act enjoys broad bipartisan support: It passed the House with support from nearly half of the chamber’s Republicans on board, and five GOP senators co-sponsored the bill in the last Congress. But McConnell’s reluctance to bring any marijuana bills to the floor for a vote hamstrung its ability to advance.

Sen. Sherrod Brown (D-Ohio) is expected to become the next chair of the Senate Banking, Housing and Urban Affairs Committee. Brown didn’t cosponsor cannabis banking bill in the last Congress, but he said in several interviews during the 116th Congress that the banking bill was something Democrats wanted to work on with Republicans.

Democrats’ control of Congress and the White House has brought financial institutions and cannabis businesses closer than ever to legislation enabling them to work together. But how exactly lawmakers enact pot banking reform has also become more complicated.

After the victories by President-elect Joe Biden and Senate Democrats, some observers urge quick action on the legislation. Others say the change of power presents an opportunity to go further and decriminalize marijuana altogether, which would give depository institutions more cover to cater to an industry under a legal cloud.

“By de-scheduling cannabis, it would remove the conflict immediately and banks would have no legal issues with working with cannabis businesses because they would be in no violation of federal law,” said Morgan Fox, a spokesperson for the National Cannabis Industry Association.

Democrats controlling the Senate could position Congress to pass the Marijuana Opportunity Reinvestment and Expungement Act, or MORE Act, which would remove marijuana from the list of scheduled substances under the Controlled Substances Act.

Some analysts believe the Democrats’ election sweep means they will attempt passing the MORE Act before pursuing one of the other two bills as a backup.

“We are more likely to see legalization legislation attempted first before Congress looks to the STATES Act as a fallback,” said Jaret Seiberg, an analyst at Cowen Washington Research Group. “If you get legalization, you won’t need special banking protections, because there won’t be any illegal activity at the federal level anymore.”

But, Seiberg added, if the Senate fails to pass either of those, “the spotlight then goes back to the SAFE Banking Act.”

Despite this positive outlook, traditional banking for the cannabis industry is likely not happening soon, and it is important for the industry to continue to have other financing options.

The passage of the Farm Bill three years ago has not yet changed the banking and lending outlook for hemp and CBD companies in any significant way.  This indicates that the ability for THC businesses to be able to get traditional bank funding is not happening any time soon despite many positive legislative changes currently pending at the federal level.

 

-John Morris
Vice Chair, Banking Finance Committee
National Cannabis Industry Association

 

 

 

 

Collaborative Cannabis Conference – February 14-16, 2017

Collective Cannabis Conference
Portland, OR
February 14-16 2017

DAF will be in Portland, OR February 14-16 for the Collective Cannabis Conference. He will be speaking on the 14th at 3:25pm in the Portland Expo Center He will be discussing how to successfully invest in the emerging cannabis industry. Please see their Investor Forum page for additional information on location and agenda.

You can receive $50 off your registration fees by using code CCCBUD. If you are a business seeking funding, please go to the Pitch Portal where you can apply for funding.

Find out more about the conference and registration here.

Why Investors Are Turning Toward Cannabis in 2017

  • Avatarby Dynamic Alternate Finance
  • Jan 18, 2017
  • 0
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The marijuana industry has come a long way in the last 5 years. The cannabis market as-a-whole is one of the fastest growing industries in North America, and is quickly becoming one of the most profitable. States that have passed some form of legalization are reporting gross sales in the billions, and these numbers will be increasing as more states legalize marijuana.

Many investors are turning toward the cannabis industry to supply capital to this cash starved industry. Whether from venture capital firms or private money investment, the marijuana space is seeing more investment from private non-bank sources than ever before. Despite marijuana being illegal at the Federal level, investors are enamored with the higher returns and the appeal of the growing industry.

Continued Research and Positive Reception
Marijuana-related products continue to gain popularity for both medical and adult use. The largest contributor to the cannabis market’s expansion is the mounting medical research showing its benefits. Able to help with ailments ranging from anxiety to cancerous tumor growth, cannabis and derivative products like CBD (Cannabidiol) oil are now receiving recommendations from doctors in many states. Attention to its medical benefits is gaining worldwide acceptance.

There are 28 states that have now legalized some form of marijuana use, where 8 of these states do not require a medical recommendation. There were 4 additional states which voted to legalize adult use in the November 2016 Elections, which has only proven to be an economic boom for states like Colorado that have had increased employment, increased tourism, real estate values and other economic benefits. Colorado reported nearly $1 billion in cannabis product sales in 2015, and the figures for 2016 are expected to be larger.

Banking Challenges
One of the largest issues marijuana businesses are faced with is the difficulty and cost of obtaining banking and traditional loans to expand their business. Despite being legal in some form in 28 states, it remains difficult for cannabis-based businesses to open a business bank account, obtain a loan, or open a line of credit. This is where private investors provide value to the industry.

Private capital is one of the preferred options available to the business owners, who want to maintain control of their company without further diluting their equity.  Dynamic Alternative Finance has been able to secure more than $25 million in funding for cannabis-based businesses in the past 2 years. The need for capital continues to grow as more businesses are expanding into other states and larger facilities.

High Returns from Sound Investments
One of the reasons investors are looking at the marijuana industry is for the above average returns and the profit potential. Investors can receive monthly cash flow and obtain returns in the 12% and higher range. The cannabis industry is constantly evolving and investors are providing new and innovative products to serve this need for capital to expand their business.

Several of these cannabis businesses are large, multi-location, vertically-integrated operations with multiple product offerings. At Dynamic Alternative Finance, we arrange financing for established marijuana businesses that require more than $250,000 to expand their operations.

The Opportunity is Only Growing
The opportunity for investors is expanding as more states legalize marijuana and cannabis business owners have a need for equipment, real estate and working capital loans. Continued legalization of cannabis and related products means that not only will more companies open in the market, but more companies will decide to move into the market. Food and beverage companies are starting to explore and expand with marijuana-infused offerings and tobacco companies are investing in cannabis vape brands. Cannabis derivatives like CBD are presenting companies the opportunity to include the health benefits of marijuana in their products, without the psychotropic effects.

Recent Transactions with DAF

  • Avatarby Dynamic Alternate Finance
  • Dec 19, 2016
  • 0
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At Dynamic Alternative Finance, we help business owners acquire the funding they need to expand and grow their business when traditional resources aren’t available. Most recently, we have helped businesses with expansion projects, inventory woes and final touches before opening. Read more about each below:

Cannabis Company Expansion $350,000
A vertically-integrated marijuana company wanted to expand past it’s 2 stores and grow operation without searching for equity capital. We were able to arrange a $350,000 deal in less than 3 weeks.

Marijuana Storefront Build-Out $350,000
A vertically-integrated cannabis company wanted to open a 4th store in the Denver area without diluting their equity. We were able to secure a $350,000 working capital loan for the build-out of their new location. They were drawn to the speed and flexibility of the lender, and the ability to obtain exceptions during the underwriting process.

Grower’s Working Capital $325,000
A wholesale adult-use cannabis grower in their first year of operation needed additional capital for marketing, equipment and supplies. Losing money, and unable to invest resources in raising equity capital, we were able to secure a $325,000 private money real estate loan using equity in the real estate and green house as collateral. This deal closed in a mere 10 days from the first call.